University:
California State University, Northridge
Course:
ECON 405 | International Trade
Academic year:

2024
Views:

167

Pages:

9
Author:

kre1dtmh

Topic 5 The Political Economy of Trade Policy Part 4 Do Agricultural Subsidies in Rich Countries Hurt Poor Countries? • Recall: subsidies ↓world price of products because they encourage domestic producers to ↑Q. • So why should poor countries want rich countries to remove their agricultural subsidies? • Because farmers in poor countries compete with farmers in rich countries. • Yet, urban residents and farmers who do not compete (e.g., coffee farmers) actually benefit from the lower prices of subsidized food on world markets. ♦ E.g., Because China imports a lot of food, it would be hurt by the removal of agricultural subsidies in rich countries (e.g., U.S. and Europe) according to the Doha negotiations. Preferential Trading Agreements • Preferential trading agreements are trade agreements between countries in which they lower tariffs for each other but not for the rest of the world. • Under the WTO, such discriminatory trade policies are generally not allowed: ♦ Each country in the WTO promises that all countries will pay tariffs no higher than the nation that pays the lowest: called the “most favored nation” (MFN) principle. Preferential Trading Agreements (cont.) • Two types of preferential trade agreements: 1. A free trade area: an agreement that allows free trade among members, but each member can have its own trade policy towards non-member countries. ♦ E.g., NAFTA 2. A customs union: an agreement that allows free trade among members and requires a common external trade policy towards non-member countries. ♦ E.g., EU Preferential Trading Agreements (cont.) • Are preferential trading agreements necessarily good for national welfare? • No, it is possible that national welfare decreases under a preferential trading agreement. • How? Rather than gaining tariff revenue from inexpensive imports from world markets, a country may import expensive products from member countries but not gain any tariff revenue. Preferential Trading Agreements (cont.) • Preferential trading agreements increase national welfare when new trade is created, but not when existing trade from the outside world is diverted to trade with member countries. • Trade creation ♦ occurs when high cost domestic production is replaced by low cost imports from other members. • Trade diversion ♦ occurs when low cost imports from non-members are diverted to high cost imports from member nations. Preferential Trading Agreements (cont.) • In Fig. 6 and 7, if Britain forms a customs union with France, tariff against France is removed but tariff against U.S. remains. • Is this good or bad for Britain? ♦ In Fig. 6, Britain’s initial tariff was high enough to exclude imports from France or U.S. Formation of a customs union is welfare improving. ♦ In Fig. 7, Britain’s initial tariff was low enough to allow imports from the U.S. –the lowest cost producer. Formation of a customs union means that French imports will replace U.S. imports. Britain will no longer receive tax revenues and its welfare declines. Fig. 6: Trade Creation S British Wheat Market P Tariff = $5 (prohibitive) PT U.S. = $9 PT France = $11 Welfare effects of customs union: $8 a ∆CS = a + b b ∆PS = -a CU = $6 ∆Net welfare = + b D SCU DCU Q Fig. 7: Trade Diversion S British Wheat Market P Price in U.S. = $4 Price in France = $6 Price in Britain = $8 Britain is a small country. Tariff = $3 $8 Welfare effects of customs union: PT U.S. = $7 CU = $6 a b c ∆CS = a + b + c + d d ∆PS = -a e PU.S.= $4 ∆G rev = -(c + e) D SCU ST DT DCU ∆Net welfare = (b + d) - e Q